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Stay Away from Highest NAV Plans

Highest NAV Guaranteed plans are usually a poor option for investors. Cut your losses if you're investing in such a plan

I had bought a SBI Life Smart Performer regular premium policy in March 2012. I had opted for an allocation of 20 per cent to the Index Fund, and the rest to the Smart Performer Daily Protect Fund III. I have already paid two annual premiums & the third premium was due in March 2014. The policy is a Highest NAV guarantee policy with premium payment term of 5 years and policy term of 10 years. Should I continue with the policy by paying the premium? As per the policy document, in case of policy lapse, the fund value will be transferred to the Discontinued Policy Fund and paid out at the end of the policy payment term i.e. 5 years. Please advise the future course of action.
-Pranay Pallav

SBI Life Smart Performer is a unit linked life insurance policy that promises to pay the investor the highest NAV attained over the plan's initial seven policy years. NAV guarantee plans are in general a poor choice for investors because in order to attain that guarantee, the fund's portfolio will be structured to take on minimal risk. The plan only promises the highest NAV it can attain over seven years and not the highest possible returns. This results in low effective returns. Moreover, such plans don't come cheap. The insurer is charging you 0.50 per cent per annum of the Daily Protect Fund's value to provide this NAV guarantee. The sum assured in this plan is only 10 times the annualized premium. Charges under the policy are high which tend to eat away all the returns generated by investment component. Premium allocation charge which is deducted at time of premium payment before allocation of units is 8.50 per cent for first year and 6 per cent thereafter till fifth year. There are other charges too. Fund Management charge which is 1 per cent for Daily Protect fund and 1.25 per cent for Index fund and Policy administration charge which is 60 rupees per month also dent the returns generated by this plan.

You have completed two years with this policy and we suggest that you discontinue paying premiums towards this policy. As stated in the policy document, your funds will be moved to Discontinued Policy fund which will earn a minimum interest of 3.5 per cent p.a without deduction of any charges thereafter. You will get your fund value after completion of five policy years. We ask you to discontinue premium payments because it isn't advisable to throw good money after bad. It is better to limit your losses while you still can.

If you are making regular annual savings towards a financial goal, consider a balanced mutual fund instead.

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